Academic journal article Australasian Accounting Business & Finance Journal

Board Composition and Firm Performance: Evidence from Bangladesh - A Sceptical View

Academic journal article Australasian Accounting Business & Finance Journal

Board Composition and Firm Performance: Evidence from Bangladesh - A Sceptical View

Article excerpt

Keywords: Board composition; Independent directors; Firm performance, Bangladesh.

JEL Classification: G34; G39.

(ProQuest: ... denotes formulae omitted.)

1. Introduction

I have read the above paper with keen interest. The key finding of this paper is interesting: the appointment of independent directors has no perceptible influence on a firm's economic performance in Bangladesh. The conclusion was derived from a sample of 274 firm-years1. The implication of this finding is also very significant for regulators in Bangladesh and elsewhere 'in their quest for harmonization of international corporate governance practices' Rashid et al. (2010, p76). This paper also complements the results of an earlier paper on an allied topic by Bhuiyan and Biswas (2007) where they found that (p22) 'corporate governance disclosure in Bangladesh is significantly influenced by local ownership, the SEC notification, and size of the company but belonging to financial or non-financial institution company, multinational company, age and size of the board of directors do not have significant impact on corporate governance disclosure. So steps should be taken for mandatory compliance of the SEC notification and for reducing the gap between large and small firms' disclosure practices'.

The issue of corporate governance is interesting and has gained significance after the collapse of Enron and more recently with the failure of Lehman Brothers in the US triggering a world-wide crisis. I must commend the authors for their work in this difficult area of research where data limitation alone can stymie their efforts. The paper contains a very good literature review and could have been even more interesting if studies on South Asian countries were included. However, the result obtained in this paper would have been richer if the authors were more diligent in some of the areas that I highlight below.

2. Modelling

The model is seemingly ad hoc and may be misspecified. The model is ad hoc because the explanators need firmer theoretical underpinnings. The model is misspecified because it omits some important relevant variables and will result in an omitted variable bias. For exposition I re-write the Rashid et al. (2010) model below:

...

Where

* Yit is alternatively ROA^sub it^ (Return on Assets) and Tobin's Qit for ith firm at time t2

* BDCOMP^sub it^ is the board composition

* DIROWN^sub it^ is the percentage of shares owned by directors for ith firm at time t

* LOGBDSIZE^sub it^ is the board size for ith firm at time t

* CEOD^sub it^ is the CEO duality for ith firm at time t

DEBT^sub it^ is the debt ratio for ith firm at time t

* LOGSIZE^sub it^ is the firm size for ith firm at time t

* LOGAGE^sub it^ is the firm age for ith firm at time t

* α is the intercept, β^sub i^ is the regression coefficient of ith variable and itεis the composite error term

* The subscript i represents the different firms and t represents the different years.

The above model tries to explain the profitability of firms (via two alternative measures: Return on Assets (ROA) and Tobin's Q) by the explanators stated above. The overwhelming majority of explanators captures only the managerial aspect of the firm and ignores the demand-supply and innovation and technological aspects of the firm which contribute to profit. The notable omissions are the firms' retained profits (re-investable surplus) which augment capital and add to profitability in the future. Similarly, firms' R&D expenditure can also be profit-enhancing in the future. From these illustrations, the model is misspecified. Further, it should not be estimated as a static model. A properly specified dynamic model must be developed to fully capture the factors contributing to profitability in a holistic sense.

A misspecified model, such as the model in Rashid et al. …

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